Auto supplier base could collapse: Grant Thornton LLP

by Jil - March 15, 2009

Detroit, Michigan – The economic impact of an automaker’s bankruptcy is being debated, but the most immediate and pervasive risk to the economy is a wholesale collapse of the automotive supply base, according to audit and tax advisory firm Grant Thornton LLP. The statement was made by Grant Thornton partner Laura Marcero to the Automotive Press Association.

According to Marcero, some 500 suppliers may be at high risk due to the cascading effect of reduced volumes and uncertainty around government support in the near term. But she said the damage can be mitigated if key suppliers take an initiative and form a coalition with automakers, banks and government to drive an orderly consolidation of the supply base.

“Suppliers struggled to make money when industry volumes were almost double what they are today, and the consolidation that has occurred has been happening mostly among smaller companies at the lower tiers,” Marcero said. “Now, we are near a tipping point where the scale and scope of supplier failures at all levels will increase dramatically.”

Marcero said that to promote a viable industry and come to proper capacity levels, the company believes that 30 to 40 per cent of all suppliers are at risk due to the necessary alignment of capacity with demand. This should stabilize to 12 to 14 million units by 2010-2011. “But if the scenario plays out in an uncontrolled fashion, every automaker will almost certainly lose production and incur steep financial losses,” she said. “Without a structured approach of consolidation to the benefit of the entire supply chain, the industry may lose critical partners with the technology, scale and geographic footprint that are linchpins in the viability equation.”

Marcero said that perhaps the most challenging item for suppliers is to win the active support of stakeholders, including the automakers, banks and government, which will require increased involvement by government, trade industry organizations and supply chain experts. “This is clearly a lot to ask of the suppliers in a short period of time, but they know their individual spaces much better than anyone else,” she said. “Frankly, if another constituent group was going to drive the supply base consolidation, it would have already occurred. Instead, the industry is somewhat paralyzed, so the suppliers need to take charge themselves and immediately begin to facilitate this process.”